Weekend Review of VIX Futures and Options - March 3, 2018

The S&P 500 was down just over 2% last week and VIX does what it does (rose) when the S&P 500 is under pressure. VIX was up over 18% and to a lesser extend the futures markets followed higher.

Worth noting above is the settlement price for March futures on Friday at 19.025. This contract does not expire until the 21st, so there’s plenty of time for VIX to come back down a bit. Usually when VIX moves up like it did and there’s this much time left to expiration the futures discount is more pronounced than what we have here. However, I think I know what’s going on.

Regardless of what ‘experts’ say about the market activity in early February, February 2nd was the beginning of all the stock market weakness and resulting moves in VIX. We got the January Employment Situation Report where what appeared to be some inflationary data scared the stock market. February 5th and 6th were follow through from what started on February 2nd.

So why rehash the past? Well, the February Employment Situation Report comes out this Friday before the market opens. Needless to say we will all be looking to see if there are any revisions to wage growth in January as well as if the cost of labor rose in February.

On Friday, I looked for a bullish trade to match up with a forecast of higher volatility through March expiration. It’s not that I have an opinion, as an employee of an exchange I’m like Switzerland. However, I do think the employment report next week can be a game changer. Mid-day with VIX at 21.80 and the standard March futures trading around 20.25 there was a medium size buyer of the VIX Mar 21st 18 Calls for 3.40 who sold the Mar 21st 27 Calls for 1.10 and a net cost of 2.30. Two payout lines show up on the diagram below. One for expiration and the other with 12 days left to expiration which matches up with the close this coming Friday.

The March 9th payoff comes with some assumptions, but the shape is correct. Do note that if VIX fades on the report the trade can be exited at a loss less than the full cost and if VIX rallies this coming Friday a profit can be booked, but at less than the full at expiration payoff of 6.70. I plan on pricing this out either way and providing an update in this space next Saturday.